Publications

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The Multijurisdictional Disclosure System (MJDS), adopted in July 1991 by the US Securities and Exchange Commission (SEC) and Canadian securities regulatory authorities, provides cost-effective and expedient access to the US capital markets. The MJDS allows eligible Canadian issuers to register public offerings and meet US continuous reporting obligations using Canadian disclosure documents that are effective immediately, without substantive review by the SEC.

The second half of 2009 saw a sharp increase in US IPO activity, with 52 IPOs closing in the third and fourth quarters, compared to only 14 during the same period of 2008. Many analysts anticipate that this momentum will continue and accelerate through 2010. As US capital markets rebound from recent dislocation, Canadian issuers are increasingly turning to the US capital markets for both capital-raising and strategic reasons.

A US public offering provides Canadian companies with access to a broader and deeper range of institutional and retail investors than is available in the Canadian capital markets. Additionally, listing on a US stock exchange such as the New York Stock Exchange (NYSE) or NASDAQ enhances the likelihood of coverage by the large and sophisticated community of research analysts in the US, which can result in increased liquidity and higher valuations. Finally, having publicly traded US securities can serve as valuable currency for merger and acquisition transactions and can facilitate equity compensation plans for US-based employees.

2009 MJDS IPOs

Two Canadian public companies, both represented by DLA Piper, successfully closed US IPOs and NASDAQ listings using the MJDS during 2009 (both in the fourth quarter). These IPOs highlight improving market conditions for well-positioned Canadian companies and the streamlined access to US capital markets that the MJDS provides.

DragonWave, Inc. DragonWave closed its $130 million NASDAQ IPO on October 20, 2009. DragonWave is headquartered in Ottawa, Ontario, and is a leading provider of high-capacity packet microwave solutions that drive next-generation IP networks. DragonWave’s US IPO is believed to be the only recent MJDS IPO by a technology company (the MJDS has historically been used primarily by oil, mining and other resource-oriented issuers in Canada). DragonWave and other technology companies are particularly well-positioned to benefit from increased coverage by US technology sector analysts.

GLG Life Tech Corporation. GLG closed its $31.7 million NASDAQ IPO on December 1, 2009. GLG is headquartered in Vancouver, British Columbia, and is a global leader in the production of stevia, an all natural, zero-calorie sweetener used in food and beverages. GLG’s stevia research, growth and processing operations are located in China. GLG’s US IPO is believed to be the first transaction of its type to use this system for a China-focused issuer. Continued US investor and analyst interest in China-focused companies and the increasing numbers of China-focused companies publicly listed in Canada create a unique opportunity for these companies to gain simplified access to the US capital markets.

DOCUMENTATION AND LEGAL FRAMEWORK

MJDS Eligibility

For Canadian companies seeking to conduct a US IPO, in most cases the appropriate MJDS form is Form F–10. Form F–10 is available to any company that (i) is incorporated or organized under the laws of Canada or any Canadian province or territory, (ii) is a foreign private issuer (as defined under US securities laws), (iii) has been subject to the continuous disclosure requirements of any securities commission in Canada for a period of at least 12 months and is currently in compliance with obligations arising from such listing and reporting, (iv) has an aggregate public float (defined as the market value of a company’s securities that are held by shareholders other than shareholders who directly or indirectly control 10 percent or more of the company’s securities) of $75 million or more and (v) is not an “investment company” registered or required to be registered under the US Investment Company Act.

Streamlined Registration Statement

One of the principal benefits of the MJDS is that the prospectus required to be filed with MJDS registration statements is prepared according to Canadian, rather than US, disclosure standards. This allows Canadian issuers to prepare a single form of prospectus for use in both Canada and the US, using familiar Canadian rules. In many instances, an MJDS offering will merely require the issuer to update and revise the offering document that was used in connection with their Canadian IPO or another recent public offering. In addition to the prospectus, the registration statement must include certain legends and an exhibit list of all documents filed with the registration statement (these are principally those documents incorporated by reference into the prospectus or required to be filed or made public in Canada in connection with the filing). Because the MJDS forms have few substantive disclosure requirements beyond those required by Canadian regulators, the MJDS creates a highly streamlined registration process and avoids review by more than one regulator.

Automatic Effectiveness

MJDS registration statements are typically not subject to substantive SEC review and generally become effective, at the issuer’s election, immediately upon filing with the SEC if related to an offering being made contemporaneously in the US and Canada. The prospectus that is included within the MJDS registration statement will be filed with, and reviewed by, the applicable provincial securities commission. Where an MJDS registration statement relates to a US-only offering, the issuer is required to designate a reviewing jurisdiction in Canada and file a copy of the registration statement with that reviewing jurisdiction concurrently with the SEC filing. The registration statement will become effective with the SEC once the reviewing jurisdiction has issued a final receipt or notification of clearance.

Financial Statements, US GAAP Reconciliation and Auditor Independence Standards

MJDS forms allow issuers to prepare financial statements included in the prospectus in accordance with Canadian disclosure rules and accounting standards. However, Form F-10 requires that Canadian issuers also include a reconciliation of the Canadian financial statements to US GAAP, as required by Item 18 of Form 20-F. The SEC recently adopted rules to allow foreign private issuers to file financial statements prepared using International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board, without reconciliation to US GAAP. Accordingly, MJDS issuers may file financial statements prepared in accordance with IFRS without a US GAAP reconciliation. However, Canadian accounting standards are not expected to allow the use of IFRS until January 1, 2011, after which IFRS will replace existing Canadian accounting standards. In addition, financial statements included in MJDS registration statements must satisfy SEC rules regarding auditor independence.

OTHER KEY PLANNING ISSUES FOR A US IPO USING THE MJDS

Liability and Antifraud Rules

The MJDS does not affect the applicability of US civil liability and antifraud rules. Although the SEC has stated that offering documents that satisfy Canadian disclosure rules in accordance with MJDS forms will not be considered misleading by virtue of the fact that other information that would normally be required by US securities law is omitted, MJDS issuers may nevertheless face civil liability and penalties under US securities laws for false or misleading statements. Accordingly, a properly drafted MJDS offering document will include, in addition to information expressly required by the applicable MJDS form, any further information that is necessary to make the required statements, in light of the circumstances under which they are made, not misleading.

Securities Exchange Corporate Governance Requirements

The NYSE and NASDAQ have adopted corporate governance standards for listed companies in connection with the requirements of the US Sarbanes-Oxley Act of 2002 (SOX). Although the rules provide certain accommodations for foreign private issuers (including MJDS issuers) that generally allow compliance with relevant home country standards rather than US exchange standards, certain requirements apply to all listed companies.

NYSE Corporate Governance Requirements for Foreign Private Issuers. The NYSE has granted substantial flexibility to foreign private issuers by allowing them to comply with the relevant home country standards instead of NYSE rules required of listed US companies. However, foreign private issuers must: (i) have an audit committee that meets the requirements of Rule 10A-3 of the Securities Exchange Act of 1934 (Exchange Act), including the requirement that each member be “independent,” (ii) disclose any significant differences between their home-country practices and NYSE corporate governance rules and (iii) annually submit an executed written affirmation certifying as to its audit committee composition, biographical information and qualifications of audit committee members and disclosure of significant corporate governance differences between home country corporate governance practices and NYSE corporate governance rules.

NASDAQ Corporate Governance Requirements for Foreign Private Issuers. NASDAQ also grants substantial flexibility to foreign private issuers with respect to corporate governance practices, allowing compliance with the relevant home country corporate governance practices in most instances. However, foreign private issuers must: (i) have an audit committee that satisfies the requirements of Exchange Act Rule 10A-3 (specifically that the committee be comprised of at least three independent members), (ii) disclose, in its registration statement or on its website (with a reference in the registration statement), each NASDAQ requirement that it does not follow and describe the relevant home country practice that is followed, (iii) not disparately reduce or restrict the voting rights of existing shareholders and (iv) provide prompt notification to NASDAQ of material noncompliance with NASDAQ corporate governance requirements.

SOX Section 404

Section 404 of SOX (Section 404) applies to MJDS issuers and requires them to include information in their annual reports concerning the adequacy of their internal control structure and procedures for financial reporting and to assess the effectiveness of such internal controls. Additionally, Section 404 requires that a registered accounting firm attest to and report on the effectiveness of issuers’ internal controls. Compliance with Section 404 requires a significant commitment of issuers’ time and resources. Under rules adopted in 2006, new US public companies are not required to comply with Section 404 until the second annual report that is required to be filed with the SEC.

US Investment Company Act

The US Investment Company Act of 1940 regulates companies that are engaged primarily in the business of investing in securities. Operating companies are sometimes caught within the definition of an investment company as a result of significant holdings in cash or investment securities. Research and development companies and real estate companies may be eligible for exemptions, and other companies may be able to avoid becoming investment companies through careful planning. Absent an exemption, a non-US investment company may not offer its securities in the US, except in certain private offerings.

CONTINUOUS DISCLOSURE OBLIGATIONS OF MJDS FILERS

As with any US public offering, a public offering using the MJDS generally creates continuous reporting obligations. An additional benefit available to MJDS issuers is the ability to satisfy US continuous reporting obligations under the Exchange Act by filing disclosure documents prepared using Canadian standards with the SEC. Canadian issuers may satisfy their US annual reporting obligations by filing their Canadian-prepared annual information form, audited financial statements and management’s discussion and analysis, together with certain additional disclosures mandated by SOX, under cover of Form 40-F. Annual financial statements included in such Forms 40-F must be reconciled to US GAAP (unless prepared in accordance with IFRS). The additional disclosures mandated by SOX include a statement of the conclusions of the principal executive officer and principal financial officer as to the effectiveness of the issuer’s disclosure controls and procedures, any weaknesses detected in those controls and procedures, and any remedial action taken. Form 40-F also requires that the Canadian issuer’s principal executive officer and principal financial officer certify the adequacy of the disclosure. Canadian issuers may satisfy their ongoing disclosure obligations during the balance of the year by furnishing, on a Form 6-K, all other information material to investment decisions that a Canadian issuer (i) makes public pursuant to the law of its home jurisdiction, (ii) files with any stock exchange on which its securities are traded or (iii) distributes to its security holders.

OTHER USES FOR THE MJDS

In addition to use by Canadian issuers conducting a US IPO, the MJDS may also be used to conduct secondary offerings, rights offerings, registration of securities in connection with merger and acquisition transactions, and by US public companies conducting a Canadian IPO or other public offering in Canada.

LEARNING MORE

DLA Piper acted as US issuer’s counsel in both of the MJDS IPOs that closed during 2009. DLA Piper represents over 80 Canadian clients (including more than 20 that are publicly traded on US stock exchanges) in a broad range of industries, and has extensive experience managing global capital markets transactions and acting as counsel to emerging growth companies in NYSE, NASDAQ and other IPOs.

For more information about MJDS offerings, please contact:

Matt Adler
Craig Andrews
Michael Hutchings
Anthony Kappus
Matthew Leivo